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DCF

The DCF, explained

By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching

4 min read · updated June 29, 2026

A DCF says something simple: a company is worth the cash it will generate in the future, discounted back to what that cash is worth today. It's the most important valuation method to nail. Comps tell you what the market is paying, but the DCF is the only one that values the business on its own fundamentals. It's also where people trip, almost always on sequence, not on math.

Here's the whole pipeline before we break it down:

Project unlevered cash flows, discount them at WACC, sum to enterprise value, then bridge to equity and per-share value.

Step 1: Project unlevered free cash flow

You forecast the cash the business throws off, typically for 5 years. Use unlevered free cash flow, meaning cash before any debt payments:

UFCF=EBIT×(1−t)+D&A−ΔNWC−CapEx\text{UFCF} = \text{EBIT}\times(1-t) + \text{D\&A} - \Delta\text{NWC} - \text{CapEx}

Start from EBIT (operating profit, before interest), tax it, add back non-cash D&A, then subtract the real cash drains: investment in working capital and capital expenditures.

Common mistake

Using levered free cash flow (cash after interest) and then discounting at WACC. Pick a lane. Unlevered FCF discounts at WACC (it belongs to all capital providers). Levered FCF discounts at cost of equity (it belongs to equity holders only). Mixing them is the most common DCF error there is.

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Frequently asked

What is a DCF?
A DCF, or discounted cash flow, values a company by the cash it will generate in the future, discounted back to what that cash is worth today. Unlike comps, which tell you what the market is paying, a DCF values the business on its own fundamentals. It is the most important valuation method to nail.
What are the four steps of a DCF?
Project unlevered free cash flow, typically for five years, then discount it at WACC. Add a terminal value for everything past the forecast, sum it all to enterprise value, then bridge to equity by subtracting net debt and dividing by diluted shares. Interviewers probe the sequence far more than the arithmetic.
How do you get from enterprise value to equity value in a DCF?
You subtract net debt, which means you subtract debt and add cash. Cash is a non-operating asset the new owner pockets, so it reduces what they effectively pay. Reversing it, adding debt and subtracting cash, inverts the single most-tested relationship in valuation. Then divide by diluted shares for value per share.
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